What to do about Fannie and Freddie?

What to do about Fannie and Freddie?

The financail crisis that we have been suffering thorugh since 2008 was started by people buying houses that they couldn't afford and defaulting on their mortgage obligations. Financial organizations were mandated by the federal government to make these loans to provide "affordable housing" and the financial market complied with low down payments, no documentation loans and bogus appraisals. I saw this with my own eyes.

These mortgages were purchased by Fannie Mae and Freddie Mac and when people started to default on the loans, these companies thate were privatelty owned and implicity supported by the federal government, started to losed billions of dollars. This resulted in the government take over in 2008.

Now, the Obama Administration starts a debate this week about what to do about Fannie Mae and Freddie Mac the organizations that support the home mortgage market in the U.S. and continue to lose, and cost US tax payers, billions of dollars. So far, these organizations have needed $148.2 billion in bailout money since late 2008 to stay afloat and now are looking for another $1.8 billion in taxpayer bailout based upon 2010 losses.

What’s at stake is that these two corporations together own or guarantee about half the mortgage debt in America. And what happens to them will affect the ability of the economy and the housing market to recover. It also has big implications for US taxpayers, who could foot even higher bailout bills if the mortgage-insurance business isn't fixed.

The group reviewing option is chaired by Timothy Geithner, Treasury Secretary and Shaun Donovan, Secretary of HUD.

Edward Pinto an ex senior executive of Fannie Mae reported in the WSJ on 8/17 that “what seems to be evolving is a consensus around explicit guarantees of a large portion of mortgage backed securities, a tax on these securities to fund low income housing projects and a requirement that issuers if securities meet affordable housing guidelines.”

He argues that “we will never get a rational mortgage system until the government’s affordable housing mandates are ended.”

In Mr. Pinto’s opinion, “short term policies need to be implemented that promote larger down payments, stricter underwriting standards, reliance on the private sector and private capital and the removal of the affordable housing mandates”.

Let’s hope these people figure out and do the right thing and get government out of the home mortgage business.

Stephen Reilly
Higgins Group
Best Practice Real Estate
203-246-7473
swreilly@swreilly.com